The business potential of flexible coupling was evident to Alex. The salespeople were looking for 35$-40$ million during 2004. He realized that the plant can't hold both lines (OEM and flexible coupling). The costs of expansion were too high and required many of the company's resources. The company's cash flow couldn't support a plant expansion. The flexible coupling industry is different than the auto industry. Every dollar of flexible coupling sales requires an investment in inventory and receivables of about 30 cents. Furthermore, in the flexible coupling industry you have to manufacture to inventory, as a result you don't see revenue right away.
Alex saw the potential in the European market; however he didn't know the foreign market that well. Exporting to the European market meant that the European costumer pays about 20 percent more (because of taxes, insurance etc).
An opportunity to penetrate the European market was offered to him in his visit to Scotland. By granting McTaggart a license, Alex ensured a quick, almost risk-free penetration to the U.K market. Along with the advantages of licensing, granting license to McTaggart, means sharing not only profits, but the unique knowledge, which is Cameron’s intellectual property.
Considering the company's financial situation, the costs and risks of penetrating to new market, I think Alex did the right thing in granting McTaggart a license.
Although it was a good opportunity, I believe he didn't handle that appropriately. He signed the contract with McTaggart without consulting with his financial, operational and legal advisers. He didn't fully take under consideration all other options before closing the deal. A comparison between his options:
| Advantages | Disadvantages |
Exporting |... [continues]
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